How to Start a Coffee Shop and NOT Go Bankrupt

by ProjectionHub on February 9, 2013

At one time or another almost every aspiring business owner I know thinks they would like to open a coffee shop someday.  Usually someone is able to talk them out of it, but sometimes you find a person that is so committed to entering this highly competitive market that there is no stopping them.  The reason that most independent coffee shops fail is because the business owner loves coffee not accounting.  They love fair trade beans, not sales.  In the end coffee is their hobby, not their business.  If that describes you, then please keep reading.  Here are 4 key steps to starting a coffee shop that is sustainable and profitable.

1.  Don’t Start With a Shop –  The first step is NOT to start your coffee business by opening a coffee shop.  Depending on how much renovation the space needs, you should expect to spend between $50,000 and $250,000 to open a coffee shop.  This is all before you make your first sale.  What if you ended up picking a bad location?  What if you took out a loan to purchase the equipment and make the renovations, and now it is taking you a bit longer than expected to ramp up your sales, and now you can’t make your loan payment?  What if you find out that people are not willing to leave their current coffee shop to come to yours?  All of your potential customers are coffee drinkers right?  They probably drink coffee every day right?  Which means they are currently getting coffee somewhere else, and  they may not care that there is a new coffee shop down the street.  There are many, many reasons not to start by opening a coffee shop right off the bat.  Instead, you should start to generate sales.

2.  Build Recurring Sales – Before you even think about investing a couple hundred thousand dollars to open a new coffee shop, start by finding customers.  That is right, you can actually build a base of repeat customers before even open a store front.  Find a small space, purchase or lease a coffee bean roaster, and start roasting your own small batches of fresh coffee beans.  Then sell your coffee to other coffee shops, local office buildings, churches, and individuals.  You need to build a base of recurring customers, customers that you can count on every day, week, or month.  Once you have that recurring income, you can start looking into financing.  You probably wouldn’t be able to get a loan anyway without sales, but even if you could it is a much better position to be in if your current customers are producing enough positive cash flow for you to be able to make the monthly loan payments.

3.  Purchase an Existing Coffee Shop – Next, I strongly recommend that you consider purchasing an existing coffee shop before you open your first shop on your own.  Why?  Because you can review the financial statements of the existing shop and see that it is profitable and sustainable based on the current customer base.  When you own your first coffee shop, you are going to make mistakes, you can afford to make a few more mistakes when you have an established and profitable business rather than trying to start something from scratch.  So you can use the wholesale and coffee by the pound business that you generated in step 2 to help you secure the financing to purchase an existing shop.  So many questions are already proven when you purchase an existing shop.  You know the location is good enough, the customer demand is there, the pricing is right, the environment in the shop is working.  You know all of these things because the business is already profitable, if you were to start from scratch, you could make mistakes in any of these areas.  I encourage you to purchase an existing shop instead of starting your own for your first experience as a coffee shop owner.

4.  Become a Pro Forma Financial Statement Expert – Now it is time to become a pro forma financial statement expert.  You have some stability with your wholesale and coffee by the pound customers, along with your established shop, now you need to start looking at various options for growth.  A pro forma is essentially a financial projection based on some given scenario.  So you might create 4 pro forma financial statements for the next 12 months based on the following scenarios:

  1. Keep everything the same as it is now
  2. Expand your wholesale side of the business by hiring a salesperson to pick up new wholesale accounts
  3. Take what you have learned from owning the first coffee shop and look to open a second location from scratch
  4. Purchase another existing coffee shop

You can develop financial projections with ProjectionHub for all 4 scenarios and determine which option you believe will be the most profitable, and put you in the best position for continued growth.

So if you are thinking of draining your retirement account and starting your own coffee shop, Don’t!  Consider how you can build the business the right way, the smart way, and the financially sound way.  Good luck!

 

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